City gives thumbs-up to Aberdeen-Standard Life

Market analysts are upbeat and fund advisers seem sanguine for the moment, though others warn of personnel disruption to come

Getty Images / FN montage

By

Mark Cobley

March 6, 2017 Updated: 2:35 p.m. GMT

The combination of UK fund manager Aberdeen Asset Management with the investment business of Standard Life looks like a necessary response to tough times, say City analysts and rivals, who delivered a generally positive verdict on the deal today.

The market welcomed the announcement warmly, sending Standard Life’s shares up 5.6% to 399.5p by 13.34 GMT, and Aberdeen's up 4.7% to 299.8p.

Mike Clements, who invests in fund managers and financials in his European equities portfolios at Syz Asset Management, and owns Aberdeen, said the company had found "what looks to be a great deal on its own doorstep", having previously been interested in US acquisitions. Clements thinks there are plenty of other consolidation deals to come in the sector.

In a note this morning titled "Granite and Guile", Justin Bates and Portia Patel, at Liberum Capital, said the two CEOs' target of £200 million in cost-savings could even end up an under-estimate.

Meanwhile, influential retail analysts Morningstar cautioned investors in the firms' mutual funds against knee-jerk withdrawals based on fears of upheaval amongst their managers.

But others warned of job losses to come at both companies, and headhunters are already rubbing their hands.

FN presents a roundup of the reaction so far today:

Mike Clements, head of European equities, Syz Asset Management

Boom times are back if you happen to be an M&A banker, especially one that specialises in financial services … the asset management sector continues to surf a wave of consolidation. After presumably having scoured the market for US-centric opportunities, Aberdeen has found what looks to be a great deal on its own doorstep. The cost synergies are clear given the operational and geographic overlaps.

The one drawback for Aberdeen and Gilbert is that for the first time since it was founded, it finds itself as the junior party to a tie-up. Still, this is no time to be choosy, especially when the rationale stacks up so well. For its part, Standard Life which is suffering outflows from its blockbuster Global Absolute Return (GARs) product, gets access to Aberdeen’s emerging market and Asian equity franchise at a time when sentiment looks to be turning for the better.

With both asset managers under pressure and looking to diversify, this deal couldn't come at a better time.

Mark Laidlaw and Ashis Dash, analysts at Morningstar

Given Aberdeen's strength in emerging market equities and Standard Life's more diversified stable of products dominated by their multi-asset range, we feel the merger of the two will be complementary – and may not lead to much rationalisation of their offerings.

That said, at this stage, we would caution investors against making any pre-emptive moves until there is greater clarity around the merger and the impact it might have on its underlying investment teams and product ranges. Until there is a clearer picture, we are maintaining our existing ratings.

Laith Khalaf, senior analyst, Hargreaves Lansdown

Aberdeen's emerging markets focus dovetails well with Standard Life's capabilities in developed markets, though there are considerable areas of overlap between the two fund groups, particularly in multi-asset, fixed income and property strategies.

Active managers are feeling the pinch when it comes to fund charges ... [cost-savings will] go some way to relieving some of that pressure on the bottom line. However that does unfortunately spell job losses for the combined group.

Paul Cook, chief executive of headhunters Alderbrooke

Despite the clear advantages of this move, ensuring a smooth integration between two of the biggest players in the asset management industry will be no mean feat. A merger of this scale provides an environment ripe for cultural clash. Those at the top of each firm [must] create the optimum corporate culture when the two companies combine … otherwise we could see high levels of staff turnover following this merger. Asset managers seeking talent will be monitoring this situation closely.

Justin Bates and Portia Patel, analysts at Liberum Capital

Aberdeen's proposed merger with Standard Life looks a good deal for Aberdeen shareholders. The enlarged group are targeting cost saves of £200m per annum [and] we think they could be as high as £250m. Brand and scale are all important. If this merger is successful, we would see it as a springboard, from a position of enhanced strength, to embark on further deals, possibly US. We do not rule out a competing bid for Aberdeen. We increase our target price to 332p and move from Hold to Buy.

Phil Dobbin and Anish Lakhani, analysts at Jefferies

£200m of synergies is in line with our assumption … helpfully, the synergies have been quantified with the main cost savings coming from simplifying and harmonising platforms (31%); eliminating overlap in distribution (16%); the rationalisation of central functions (12%) and rationalising the property portfolio and related property management fees and various other costs. Standard Life’s directors also believe that significant further value can be created through complementary investment distribution capabilities and limited client overlap.

Neil Wilson, senior market analyst, ETX Capital

The deal makes perfect sense as a defensive play. The explosive growth in passive investing trends has heaped pressure on active managers like Aberdeen and Standard Life and consolidation had to be on the cards. According to Morningstar, more than half a trillion dollars has flowed in to active funds over the last year, while $325bn has flowed out of active funds. No industry can survive this kind on disruption without consolidation.

Cost savings should be easy to deliver as back office systems and teams can be merged. Merging teams might be harder than IT but the cultures are not so very different. Job losses seem certain – up to 10% of the merged workforce has been talked about.